Journal of Risk

Testing hedge effectiveness for option positions

Jeroen Kerkhof, Bertrand Melenberg, J. M. Schumacher*


In this paper we test several models for the computation of risk measures. Our framework applies not only to value-at-risk but also to expected shortfall and other risk measures that depend on information from the tail distribution. We concentrate on market risk as represented by single-period hedge errors of delta-hedged option positions. For cases in which we only have price data for options with fixed time of maturity, we propose a transformation procedure to compensate for the change in risk characteristics of the option position over time. Our results indicate that it is crucial to take changes of volatility into account; this may be done by using historical simulation or by a simple vector autoregressive model.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to View our subscription options

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here